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How to Structure a Sales Compensation Plan

Selling Power Blog

Here is the text from the article:

Sales-commission structures can make or break business growth, yet many companies don’t give them the attention they deserve.

The key is to design, create, and implement a sales compensation plan that continually evolves alongside the business. Organizations must have a clear understanding of the goals they’re trying to achieve and then tightly integrate them into the sales commission structure so that it incentivizes actions that, not only promote growth, but have direct positive impact on employee earnings and the organization’s bottom line.

To get started, organizations need to do a reality check by considering these questions:

  • What size is the company?
  • How new is the company to the market?
  • How big is the company’s market share?
  • How long is the sales cycle?
  • What type of growth is the business trying to achieve?

Answering these questions will help determine the optimal sales compensation plan. Remember, it should be aligned it with goals that drive increased profit.

Once these basic questions are answered, organizations should begin outlining a sales compensation plan in four main areas:

  1. Strategy: Do you offer increasing commission over time or after a certain number of successful sales? You need to intentionally design the sales commission structure so it accelerates reps through the ranks.
  2. Payout structure: Will you pay reps a set rate per close or base pay on profit margin or something else? This depends on your business’s product/service.
  3. Performance benchmarks: How will you monitor, manage, and report to your sales team? Are there certain quotas to meet? What are the monthly or quarterly goals? Are sales reps competing against each other?
  4. Problem procedures: Issues can and will occur. What if two reps determine they have closed the same client? There must be a clear plan in place that eliminates debate or arguments.

Next, the management team needs to clearly communicate what the sales compensation plan is intending to accomplish. To do this, the sales commission structure should be:

  • well documented and freely available to all staff and potential candidates;
  • extremely simple, with no fine print, legal language, or confusing words;
  • clear about what needs to be accomplished to reach certain goals;
  • fair and enticing to both the employer and employee.

Bonus tip: If the company is new, selling a new product, or entering a new market, it will require above-average compensation to attract the best salespeople. High-performing salespeople understand the value they bring. Before joining a new company, they consider the pros and cons by weighing potential earnings against potential risk.

Finally, organizations must consider the specific elements of a sales commission structure and calculate the fine details:

How do you figure out the acceptable payment range?

Many companies determine fixed commissions by looking at the cost per good sold and base that against potential profit and earnings. Unfortunately, this approach tends to be complicated, as it can be calculated by using just manufacturing costs or by adding marketing, administrative, and other expenses.

How do you choose a type of commission?

Companies that have room to negotiate price will typically use percentage of profit to drive the highest possible close. Others use a fixed commission per sale, but ideally there should be incentive for improvement by offering a commission “ladder.”

Additional considerations while working on a sales compensation plan:

  • Test out multiple structures over a certain time frame.
  • Ask candidates or current salespeople what would interest them.
  • Track all of the metrics involved in the commission structure.
  • Leave room in the budget for spur-of-the-moment sales contests.

By spending the additional time and effort to create a comprehensive plan, organizations can ultimately position themselves for higher growth. We have compiled a list of sales compensation plan examples by industry to help you get started.